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China bank urges fund for poorer countries
Published on: 2009-09-23
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LONDON -- The Group of 20 industrial and developing economies should consider setting up an international wealth fund that would invest a portion of its members' current-account surpluses in developing economies, People's Bank of China Deputy Governor Hu Xiaolian said in a paper released Tuesday.

The paper was part of a report on a conference of G-20 policy makers in Mumbai in May. The senior central-bank and finance-ministry officials met to discuss the causes of the global financial crisis and the lessons to be learned from it.

The officials discussed the role of the U.S. dollar as the main reserve currency in contributing to the crisis, according to the report. "There were a range of views over the best way to strengthen the reserve system," it said.

Before the crisis, China and other developing economies had large current-account surpluses as a result of their exports to developed economies, and growing foreign-exchange reserves. Much of this money flowed back to developed countries in the form of cheap credit, leading to excessive risk-taking.

In her paper, Ms. Hu proposed that one solution to the "flowback" problem would be to establish a "supra-sovereign-wealth investment fund" that would invest some of the surplus in poor countries "so that these countries can serve as new engines in global recovery and growth."

Since the financial crisis last year, China and other large developing economies have argued that the dominant role played by the U.S. dollar is a source of weakness for the global economy.

Although conducted at a relatively junior level, and repeating many known arguments, it's significant that G-20 members discussed possible changes to the reserve system.

However, the G-20 officials were divided on the actions that need to be taken to strengthen the system, though many argued a more "balanced" spread of reserve currencies was preferable.

Developing economies such as China "argued that this would best be pursued through the creation of a new global reserve asset based on the SDR (Special Drawing Rights)" -- an artificial currency used for accounting by the International Monetary Fund.

But other members argued that central banks are already in a position to diversify their reserves by buying euros, yen or other currencies, and that "it was not clear that a new composite currency needed to be actively created."

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